SUMMARY: The FDIC is preserving the current adjusted rate schedule for
assessments paid to the Bank Insurance Fund (BIF) for the second
semiannual period of 1997 (July-December), and for subsequent
semiannual periods subject to review on a semiannual basis. Absent
action by the FDIC, the BIF rates would revert to the base rates, which
are 4 basis points higher. The resulting assessments would exceed the
amount allowed by law.
The FDIC is issuing the final rule without prior notice and comment
under the procedure established by the FDIC's regulations for making
limited adjustments to base assessment rates.
The final rule removes obsolete provisions regarding the special
assessment and pre-1997 rates, and clarifies other provisions without
altering their substance.

In accordance with section 7(b) of the Federal Deposit Insurance
(FDI Act), 12 U.S.C. 1817(b), the FDIC has adopted a risk-based
assessment program for the BIF. The program has two main components.
The first component is a set of base rates that are appropriate for the
BIF over the long term. These rates, which are presented in the BIF
Base Assessment Schedule, see 12 CFR 327.9(a)(2)(i), will be changed
only after full notice-and-comment rulemaking. The second component is
a mechanism for making limited and relatively short-term adjustments to
the BIF base rates. The adjustments are made by rulemaking without
prior notice and comment, see id. 327.9(c), but are revisited by the
FDIC on a semiannual basis. The adjusted rates are presented in the BIF
Adjusted Assessment Schedule. See id. 327.9(b)(2)(i). The adjusted
rates are the effective ones--that is, the rates that BIF-assessable
institutions currently pay to the BIF.1
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\1\ An institution that holds BIF-assessable deposits must also
pay an assessment to the Financing Corporation (FICO) based on those
deposits. 12 U.S.C. 1441(f)(2); see Deposit Insurance Funds Act of
1996 (Funds Act), Pub. L. 104-208, section 2703, 110 Stat. 3009,
3009-479 et seq. (Sept. 30, 1996). The FICO payment is separate
from, and in addition to, the BIF assessment.
The FDIC will continue to collect the FICO assessments on the
FICO's behalf. The FDIC's quarterly invoices will reflect the
current amount of the FICO assessment.
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The BIF base assessment rates are appropriate, over the long term,
to generate assessments that maintain the BIF's capitalization at the
level prescribed by statute. The base rates reflect a thorough
historical analysis of FDIC experience, including consideration of
recent statutory changes that may moderate future deposit insurance
losses (e.g., prompt corrective action authority and the least-cost
resolution requirement). See 60 FR 42680 (Aug. 16, 1995). The BIF base
rates range from 4 basis points (bp) for institutions in the best
assessment risk classification (1A institutions) to 31 bp for
institutions in the least favorable one. The final rule does not alter
these rates.
Over the short term, however, the BIF base rates would produce a
continued rise in the Bank Insurance Fund reserve ratio (BIF reserve
ratio)--that is, in the ratio of the BIF's net worth to the aggregate
estimated deposits that the BIF insures. See 12 U.S.C. 1817(l)(6). The
BIF reserve ratio is currently above the target ratio prescribed by
statute, and is rising. (See discussion at I.B., below). The FDIC's
Board of Directors (Board) has therefore adopted a temporary adjustment
to the BIF base rates. See 61 FR 64609 (Dec. 6, 1996). The adjustment
has lowered the base rates by 4 bps. The resulting adjusted rates
(which are now in effect) range from zero to 27 bp.
The adjustment only applies to the current semiannual period
(January-June 1997), and expires at the end of it. See 12 CFR
327.9(b)(2)(ii). Absent this final rule, the effective BIF rates would
revert to the long-term rates set forth in the BIF Base Assessment
Schedule.
The final rule preserves the effective BIF rates at their current
levels for the second semiannual period of 1997 (July-December) and
indefinitely thereafter. The final rule does so by making an adjustment
to the BIF Base Assessment Schedule in accordance with the procedure
prescribed in id. 327.9(c). The adjustment lowers the rates in the BIF
Base Assessment Schedule by four bp. The adjustment is of indefinite
duration, but is reviewed semiannually.

1. Statutory Provisions
The touchstone for setting a fund's assessments is the fund's
reserve ratio. When that ratio is below the ``designated reserve
ratio'' (DRR),2 the

[[Page 27172]]

FDIC must set assessments to increase the fund's reserve ratio to the
DRR. When the reserve ratio is at or above the DRR--as is now the case
for the BIF--the FDIC must set assessments to maintain the reserve
ratio at the target DRR. 12 U.S.C. 1817(b)(2)(A)(i). The FDIC may not
generally set assessments in excess of the amounts needed to meet these
goals. Id. 1817(b)(2)(A)(iii). But the FDIC may set such assessments
for institutions that exhibit financial, operational, or compliance
weaknesses or are not well capitalized. Id.
1817(b)(2)(A)(v).3
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\2\ The DRR is a target ratio that has a fixed value for each
year. The default value is 1.25 percent. The FDIC may set a higher
value under certain conditions, but has not exercised that power.
See 12 U.S.C. 1817(b)(2)(A)(iv).
\3\ The FDIC has by regulation interpreted this provision to
embrace institutions that have an assessment risk classification
other than 1A. See 12 CFR 327.10.
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In order to determine the aggregate amount to be collected for a
fund, the FDIC must consider: (1) The fund's expected operating
expenses; (2) the fund's case resolution expenditures and income; (3)
the effect of assessments on the earnings and capital of fund members;
and (4) any other factors that the FDIC deems appropriate. Id.
1817(b)(2)(A)(ii).4
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\4\ The FDIC must base a particular institution's semiannual
assessment on the following factors: (1) The probability that the
institution will cause a loss to the fund, (2) the likely amount of
the loss, and (3) the fund's revenue needs. 12 U.S.C. 1817(b)(1)(C).
To that end, the FDIC assigns every institution to an ``assessment
risk classification,'' and sets rates for each of the
classifications. See 12 CFR 327.4 and 327.9.
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2. Regulatory Provisions
The FDIC has adopted a special procedure for making limited and
relatively short-term adjustments to a fund's base rates in order to
maintain the fund's reserve ratio at the target DRR. See 12 CFR
327.9(c).
Adjustments are subject to strict constraints. An adjustment must
apply uniformly to every rate in the base assessment schedule. No
adjustment may, when aggregated with prior adjustments, cause the
adjusted rates to deviate at any time from the base rates by more than
5 bp. No one adjustment may constitute an increase or decrease of more
than 5 bp. And no adjustment may result in a negative assessment rate.
Id. 327.9(c)(1).
In line with the statutory requirements for setting assessments, an
adjustment is determined by (1) the amount of assessment revenue
necessary to maintain the fund's reserve ratio at the DRR, and (2) the
assessment schedule that would provide the amount so needed considering
the risk profile of the institutions that pay assessments to the fund.
Id. To determine the assessment revenue needed for a fund, the FDIC
considers the fund's expected operating expenses, its case resolution
expenditures and income, the effect of assessments on the earnings and
capital of the institutions paying assessments to the fund, and any
other relevant factors. Id. 327.9(c)(2).

C. The BIF Adjusted Assessment Schedule

For the reasons given below, the FDIC considers that there is no
current need for assessment income to maintain the BIF's reserve ratio
at the target DRR. Accordingly, the final rule adjusts the rates in the
BIF Base Assessment Schedule by lowering each rate 4 bp, effective July
1, 1997, thereby retaining the rates currently in effect. The adjusted
rates are as follows:

1. Maintaining the BIF Reserve Ratio at the Target DRR. As of
December 31, 1996 (unaudited), the latest date for which complete data
are available, the BIF had a balance of $26.854 billion (see Table 3)
and a reserve ratio of 1.34 percent. The industry's performance in
recent months has been strong; the growth of the BIF reserve ratio has
been robust. Accordingly, the near-term outlook for the BIF reserve
ratio is favorable.
Expected operating expenses. Operating expenses were approximately
$505 million during 1996. They averaged $42 million per month for the
year, but increased to an average of $55 million per month during the
last quarter of 1996 (a full-year equivalent figure of $656 million).
For 1997, operating expenses are projected to be $652 million. The
savings from corporate downsizing is offset by a higher allocation of
overhead expenses to corporate, a result of fewer receiverships.
Case resolution expenditures and income. Expected case resolution
expenditures and income are reflected in projected insurance losses,
which consist of two components: a contingent liability for future
failures, and an allowance for losses on institutions that have already
failed. Using the FDIC's current estimates of failed-bank assets and a
20 percent loss rate on such assets, the change in the contingent
liability for future failures is estimated to be between $100 million
(low estimate) and $300 million (high estimate) for calendar year 1997.
While annual changes in the allowance for losses on past failures,
as a percent of the estimated net recovery value of closed
banks,5 have been as high as +13 percent and as low as -16
percent over the last five years, the change in 1994 was -5.75 percent
, +10.2 percent in 1995, and -3.0 percent in 1996. An estimated range
of +5 percent to -5 percent was used in the projections detailed below.
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\5\ The estimated recovery value of closed banks was $4.34
billion as of December 31, 1996.
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Table 1 summarizes the effect of these assumptions on projections
of the provision for losses:

Assessment Income. Based on the distribution of the assessment base
across the BIF assessment rate matrix as of January 1, 1997, BIF
assessment income for 1997 would be $23 million under the existing
assessment rate schedule.
Table 2 summarizes the distribution of institutions across the
risk-based assessment matrix:

With 99.0 percent of the number of institutions and 99.8 percent of
the assessment base in the three lowest assessment risk classifications
(1A, 1B and 2A), the current distribution in the matrix reflects little
fundamental difference from the previous period when the percentages
were 98.7 percent and 99.2 percent, respectively. The slightly lower
number of institutions in these three categories (down 229) reflects
continuation of industry consolidation trends, as the overall total
declined by 247 institutions. There are only 102 institutions outside
the three lowest assessment risk classifications compared to 120 during
the previous period, and only 490 outside the 1A classification as
compared with 561 in the previous period.
Interest Income. Income from the estimated average investment
portfolio of $24.5 billion is estimated at $1.485 billion for 1997
(6.06 percent yield). Given a range of + or -19 bp for the yield (5.87
percent to 6.25 percent) for 1997, based on a range for interest rate
changes of + or -100 bp, interest income is projected to be between
$1.438 billion and $1.531 billion.
Table 3 summarizes the effects on the fund balance of the low and
high estimates that define the ranges assumed for interest income and
insurance losses:

Growth of insured deposits. Insured deposit growth has been
volatile. Since 1986, annual growth of BIF-insured deposits has been as
high as 7.1 percent and annual shrinkage as much as 2.1 percent:

BILLING CODE 6714-01-P

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[GRAPHIC] [TIFF OMITTED] TR19MY97.012

BILLING CODE 6714-01-C

The recent trend has been toward growth. Over the last two years
there have been only two quarters in which insured deposits have
shrunk, and even then the shrinkage has been slight (.01 percent and
.03 percent). It is difficult to determine whether this development
primarily reflects the incentives created by reduced BIF assessment
rates, including the incentive for deposit-shifting from the Savings
Association Insurance Fund (SAIF) to the BIF, or whether it indicates a
change in the pattern of BIF-insured deposit growth due to other
causes. With the passage of the Funds Act and the recent revision of
FDIC rules governing the allocation of deposit growth or shrinkage
between the BIF and the SAIF, both of which should inhibit deposit-
shifting, the primary causes of recent BIF-insured deposit growth
should become clearer. In the interim, considering the experience of
the last five years taken together, the FDIC considers that BIF-insured
deposits are likely to experience a growth rate in the range of -2
percent to +5 percent between year-end 1996 and year-end 1997.
Based on the projected BIF balance and the growth of the insured
deposit base, the FDIC projects the BIF reserve ratio to be within the
range of 1.29 to 1.42 at December 31, 1997:

The low estimate produces a 5 bp decrease below the December 31,
1996, ratio. It reflects an assumed increase in the insured deposit
base (+5 percent for 1997) and a small offset from an increase in the
fund balance. (The fund balance in the low-estimate scenario increases
because the higher projected insurance losses still do not fully offset
interest income.) The high-estimate scenario produces an 8 bp increase
above the December 31, 1996, ratio. It reflects an assumed shrinkage of
the BIF-insured deposit base (-2 percent for 1997) and a strong
increase in the BIF balance due to low insurance losses and high
interest income.
In light of recent trends and current conditions in the banking
industry, the FDIC considers that the low-estimate scenario is not
likely to be realized. Even if it were, however, the current rate
schedule still would be sufficient to maintain the BIF's reserve ratio
at the DRR through year-end 1997.
2. Impact on Institutions' Earnings and Capital
The estimated annual costs to BIF-assessable institutions, before
taxes, from the existing rate schedule is $23 million, down from the
$43 million estimate based on July 1, 1996, classifications. This
decline is largely due to the assessment base of 1A institutions
increasing from 96.8 percent to 98.3 percent of the total.
Additionally, the estimated total base increased $148.0 billion while
the 1A base increased $181.3 billion.
Institutions having approximately $45 billion in deposits, out of a
total base of approximately $2,642.0 billion (1.7 percent), will be
charged a non-zero risk-based assessment. Having considered the impact
on these institutions' earnings and capital, the FDIC believes that the
BIF adjusted rates will have no unwarranted adverse effects.
3. Assessment Schedule Needed to Generate the Revenue
The FDIC does not presently need to collect assessment revenues
from 1A institutions in order to maintain the BIF reserve ratio at the
DRR over the short term.6 The FDIC is therefore lowering the
rates in the BIF Base Assessment Schedule by four bp. The adjustment
results in an effective assessment rate for 1A institutions of zero bp.
The BIF effective rates are set forth in the BIF Adjusted Assessment
Schedule.
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\6\ The assessments payable by non-1A institutions reflect the
amounts needed to maintain a risk-based assessment system for the
BIF.
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Removing them simplifies and clarifies the current regulation.
During the final calendar quarter of 1996, a particular group of
SAIF-assessable institutions--namely, SAIF-member savings
associations--were subject to a special interim set of adjusted rates.
The interim rates expired on December 31, 1996. From the start of 1997
forward, all SAIF-assessable institutions have been subject to the same
SAIF adjusted rates. The references to the pre-1997 SAIF adjusted
rates--and, in particular, to the special interim rates--are no longer
needed.
The final rule does not alter either the SAIF Base Assessment
Schedule or the SAIF Adjusted Assessment Schedule now in effect, but
merely republishes these schedules. The effective SAIF rates, which
range from zero to 27 bp, remain at the current levels.
2. Removal of Special-Assessment Provisions
The final rule eliminates subpart C of part 327, which is chiefly
concerned with the special assessment imposed by the Funds Act. The
FDIC has assessed and collected the special assessment. The vast
majority of subpart C has therefore become obsolete.
A few provisions of Subpart C--those that pertain to institutions
that were exempted from the special assessment--have a continuing
vitality. The Funds Act requires these institutions (and their
successors) to pay SAIF assessments at the rates in effect on June 30,
1995, for three years. Funds Act section 2702(f)(4)(A). The Funds Act
also gives the institutions (and their successors) the power to
terminate that obligation by paying a pro rata share of the amount
otherwise due for the special assessment. Funds Act section
2702(f)(4)(B). The final rule retains but relocates the provisions from
subpart C that pertain to these matters.
3. Definitions
The final rule adds an introductory phrase to 12 CFR 327.8, which
sets forth definitions. The introductory phrase makes it clear that
Sec. 327.8's definitions apply throughout part 327, and not just within
subpart A.
The final rule retains the provisions, heretofore found in subpart
C, defining ``BIF'' and ``SAIF.''

E. Rulemaking Procedures; Effective Date

1. The BIF Rate Adjustment
The Board is issuing this final rule in pursuant to id. 327.9(c),
which enables the Board to adjust the rates in a fund's base assessment
schedule without engaging in notice-and-comment rulemaking proceedings
for each adjustment. The final rule is therefore effective immediately
upon adoption. The adjustment made by the final rule, and the BIF
adjusted rates specified in the final rule, apply during the second
semiannual period of 1997 (July-December, 1997) and subsequent
semiannual periods.
The Board has found it necessary to establish this procedure
because the FDIC must set ``semiannual'' assessments, see 12 U.S.C.
1817(b)(2)(A), and therefore reviews the assessment schedule for each
insurance fund every six months. Moreover, the FDIC ``shall set
assessments when necessary, and only to the extent necessary'' to
maintain an insurance fund's reserve ratio at the DRR, or to raise an
insurance fund's reserve ratio to that level, id. 1817(b)(2)(A)(i);
conversely, the FDIC ``shall not set assessment rates in excess of the
amount needed'' for those purposes, id. 1817(b)(2)(A)(iii). These twin
commands require the FDIC to respond quickly in order to keep each
fund's assessments commensurate with its level of capitalization.
As discussed in more detail in the Federal Register of December 24,
1996, in which the FDIC established the current procedure for adjusting
the base rates, and also in the Federal Register of August 16, 1995, in
which the FDIC adopted its prior procedure for adjusting the BIF base
rates temporarily by means of a Board resolution, the FDIC recognizes
and understands the concern for the possibility of assessment rate
increases without the benefit of full notice-and-comment rulemaking.
See 61 FR 67687, 67693-67694 (Dec. 24, 1996); see also 60 FR 42680,
42739-42740 (Aug. 16, 1995). Nevertheless, for the reasons given below,
the FDIC considers that notice and public participation with respect to
the adjustment made by this final rule would generally be
``impracticable, unnecessary, or contrary to the public interest''
within the meaning of 5 U.S.C. 553(b). For the same reasons, the FDIC
considers that it has ``good cause'' within the meaning of id. 553(d)
to make the final rule effective immediately, and not after a 30-day
delay.
Notice-and-comment rulemaking procedures are ``unnecessary'' in
this case because BIF-assessable institutions are already on notice
with respect to: (1) The benchmark rates that are set forth in the BIF
Base Assessment Schedule; (2) the need for making routine semiannual
adjustments to those rates; and (3) the maximum amount of the
adjustment. In short, institutions are fully aware that the effective
rates are subject to some limited amount of variability, and that any
variations in the rates are directly tied to the capitalization of the
BIF.
Notice-and-comment rulemaking procedures are also ``unnecessary''
because they would not provide additional relevant information.
Institutions provide part of the needed information in their quarterly
reports of condition. The FDIC generates the rest of the information
internally: e.g., the current balance and expected operating expenses
of the BIF, and the BIF's case resolution expenditures and income.
Notice-and-comment rulemaking procedures are ``impracticable'' and
``contrary to the public interest'' in this case because they are not
compatible with the need to satisfy two competing interests. On one
hand, the FDIC must comply with the statutory directive to maintain the
BIF's reserve ratio at the target DRR. The FDIC must monitor the BIF
closely, and must use data that are as current as possible to set BIF
assessments on a semiannual basis. On the other hand, the FDIC must
give institutions adequate notice of those assessments. In the current
case, the assessment is due on June 30. See 12 CFR 327.3(c)(2). The
FDIC must issue invoices by May 31. See id. 327.3(d)(1). The FDIC must
announce the rates--and therefore must adopt the final rule--by May 16.
See id. 327.9(c)(4). Notice-and-comment procedures entail delays that
are incompatible with these tight scheduling requirements.
2. Other Changes
The other changes made by the final rule are ``housekeeping''
measures of a purely interpretative nature. Neither prior notice and
comment, nor a delayed effective date, are required for such rules. 5
U.S.C. 553(b) and (d).

II. Paperwork Reduction Act

No collections of information pursuant to section 3504(h) of the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.) are contained
in this rule. Accordingly, no information has been submitted to the
Office of Management and Budget for review.

III. Regulatory Flexibility Analysis

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., does
not apply to this rule. The RFA defines ``rule'' to exclude ``a rule of
particular applicability relating to rates''. Id. 601(2). The FDIC
considers that the rule is governed by this exclusion.
In addition, the legislative history of the RFA indicates that its
requirements are inappropriate to this proceeding.

[[Page 27176]]

The RFA focuses on the ``impact'' that a rule will have on small
entities. The legislative history shows that the ``impact'' at issue is
a differential impact--that is, an impact that places a
disproportionate burden on small businesses:

Uniform regulations applicable to all entities without regard to
size or capability of compliance have often had a disproportionate
adverse effect on small concerns. The bill, therefore, is designed
to encourage agencies to tailor their rules to the size and nature
of those to be regulated whenever this is consistent with the
underlying statute authorizing the rule. 126 Cong. Rec. 21453 (1980)
(``Description of Major Issues and Section-by-Section Analysis of
Substitute for S. 299'').

The final rule does not impose a uniform cost or requirement on all
institutions regardless of size. Rather, it imposes an assessment that
is directly proportional to each institution's size. Nor does the rule
cause an affected institution to incur any ancillary costs of
compliance (such as the need to develop new recordkeeping or reporting
systems, to seek out the expertise of specialized accountants, lawyers,
or managers) that might cause disproportionate harm to small entities.
As a result, the purposes and objectives of the RFA are not affected,
and an initial regulatory flexibility analysis is not required.

IV. Riegle Community Development and Regulatory Improvement Act

Section 302(b) of the Riegle Community Development and Regulatory
Improvement Act of 1994 (Riegle Act) requires that, as a general rule,
new and amended regulations that impose additional reporting,
disclosure, or other new requirements on insured depository
institutions shall take effect on the first day of a calendar quarter.
See 12 U.S.C. 4802(b). This restriction is inapplicable because the
final rule would not impose such additional or new requirements.
Nevertheless, the changes made by the final rule apply beginning July
1, 1997, in line with the Riegle Act's specification.

V. Congressional Review

As a general matter, when an agency adopts a final rule, the agency
must submit to each House of Congress and to the Comptroller General a
report containing a copy of the rule, a general statement relating to
the rule, and the rule's proposed effective date. 5 U.S.C. 801(a)(1).
But the term ``rule'' excludes ``any rule of particular applicability,
including a rule that approves or prescribes for the future rates''.
Id. 804(3). The final rule is governed by this exclusion, because the
final rule sets assessment rates and relates to the computations
associated with assessment rates. Accordingly, the reporting
requirement of id. 801(a)(1), and the more general requirements of id.
sections 801-808, do not apply.

2. Section 327.8 is amended by adding introductory text and by
revising paragraphs (f) and (g) to read as follows:

Sec. 327.8 Definitions.

For the purpose of this part 327:
* * * * *
(f) BIF; BIF member. (1) BIF. The term BIF means the Bank Insurance
Fund.
(2) BIF member. The term BIF member means a depository institution
that is a member of the BIF.
(g) SAIF; SAIF member. (1) SAIF. The term SAIF means the Savings
Association Insurance Fund.
(2) SAIF member. The term SAIF member means a depository
institution that is a member of the SAIF.
* * * * *
3. Section 327.9 is amended by revising paragraph (b) to read as
follows:

Sec. 327.9 Assessment schedules.

* * * * *
(b) Adjusted assessment schedules--(1) In general. Except as
provided in paragraph (b)(3)(ii) of this section, institutions shall
pay semiannual assessments at the rates specified in this paragraph (b)
whenever such rates have been prescribed by the Board.
(2) Adjusted rates for BIF members. The Board has adjusted the BIF
Base Assessment Schedule by reducing each rate therein by 4 basis
points for the first semiannual period of 1997 and thereafter.
Accordingly, the following adjusted assessment schedule applies to BIF
members:

(3) Adjusted rates for SAIF members--(i) In general. The Board has
adjusted the SAIF Base Assessment Schedule by reducing each rate
therein by 4 basis points for the first semiannual period of 1997 and
thereafter. Accordingly, except as provided in paragraph (b)(3)(ii) of
this section, the following adjusted assessment schedule applies to
SAIF members:

(ii) Institutions exempt from the special assessment--(A) Rate
schedule. An institution that, pursuant to former Sec. 327.43 (a) or
(b) as in effect on November 27, 1996 (See 12 CFR 327.43 as revised
January 1, 1997.), was exempt from the special assessment prescribed by
12 U.S.C. 1817 Note shall pay regular semiannual assessments to the
SAIF from the first semiannual period of 1996 through the second
semiannual period of 1999 according to the schedule of rates specified
in former Sec. 327.9(d)(1) as in effect for SAIF members on June 30,
1995 (See 12 CFR 327.9 as revised January 1, 1996.), as follows:

(B) Termination of special rate schedule. An institution that makes
a pro-rata payment of the special assessment shall cease to be subject
to paragraph (b)(3)(ii)(A) of this section. The pro-rata payment must
be equal to the following product: 16.7 percent of the amount the
institution would have owed for the special assessment, multiplied by
the number of full semiannual periods remaining between the date of the
payment and December 31, 1999.
* * * * *